Stockwatch Energy today
Energy Summary for Jan. 18, 2021
2021-01-18 19:53 ET - Market Summary
by Stockwatch Business Reporter
U.S. markets were closed for Martin Luther King Jr. Day. West Texas Intermediate crude for February delivery edged down two cents to $52.34 in electronic trading on the New York Merc, while Brent for March lost seven cents to $55.03 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.84 to WTI, up from a discount of $14.00. Natural gas for February lost nine cents to $2.65. The TSX energy index lost 1.56 points to close at 97.10.
The oil patch was abuzz with the disappointing (if unsurprising) news that U.S. president-elect Joe Biden still plans to kill the Keystone XL pipeline being built by TC Energy Corp. (TRP), down $2.57 to $54.00 on 3.87 million shares. The rumours started after a purported briefing from Mr. Biden's transition staff was circulated over the weekend. "Rescind Keystone XL pipeline permit" was on a list of executive actions apparently scheduled for the first day of Mr. Biden's presidency.
While Mr. Biden campaigned partly on a promise to scrap the $8-billion (U.S.) pipeline, Canadian politicians -- notably Alberta Premier Jason Kenney -- had hoped he would change his mind once in office, as TC Energy has taken several recent steps to make the project more palatable. These include reaching agreements with U.S. labour unions and selling part of the line to Canadian indigenous groups. Mr. Kenney has adopted a more belligerent stance, having warned that if Keystone XL's permit is retroactively rescinded, Alberta will investigate legal options. He repeated the warning in a statement yesterday as he took to Twitter to proclaim himself "deeply concerned" about the potential cancellation. "Doing so would kill jobs on both sides of the border, weaken the critically important Canada-U.S. relationship and undermine U.S. national security by making the United States more dependent on OPEC oil imports," said Mr. Kenney. He vowed to "work with TC Energy to use all legal avenues available to protect its interest in the project."
This is no hypothetical interest: Mr. Kenney's government agreed last year to invest $1.5-billion in Keystone XL and provide up to $6-billion in loan guarantees. The $7.5-billion investment came amid full knowledge of Mr. Biden's anti-Keystone-XL stance. Mr. Kenney sought to reassure uneasy taxpayers that any attempt to cancel the line would be met with legal action. Worth noting is that after former president Barack Obama rejected Keystone XL in 2016, TC Energy launched a $15-billion (U.S.) Chapter 11 NAFTA challenge against the U.S. government, only to suspend the challenge in 2017 after then-president Donald Trump resurrected the line. This challenge could be resurrected depending on Mr. Biden's actions. Of course, as the uneasy taxpayers may have been well aware, the U.S. government has never once lost a Chapter 11 NAFTA case. TC Energy might realistically be better off doing what it did last time and waiting for a presidential turnover.
Alternatively, TC Energy could keep trying to win over Mr. Biden. To that end, the company announced today that Keystone XL "commits to become the first pipeline to be fully powered by renewable energy." It claimed that the pipeline will be able to achieve net-zero-emission status the moment it starts operating in 2023, a feat the company will accomplish by buying renewable energy, renewable energy credits (RECs) or carbon offsets. By 2030, all of the line is expected to be powered by renewable sources, promised TC Energy. "By implementing this initiative, Keystone XL will eliminate the impact of GHG [greenhouse gas] emissions from the project's operations," declared the company. It is no doubt hoping that it has handily removed one of Mr. Biden's key objections to the line. A big test will come on Wednesday, Mr. Biden's first day in office.
Within the oil patch, Scott Ratushny's Cardinal Energy Ltd. (CJ) lost four cents to 92 cents on 915,400 shares, after releasing its 2021 guidance. It will aim to produce 17,500 to 18,000 barrels of oil equivalent a day on a budget of $25-million to $30-million. These numbers are very close to their 2020 counterparts, and may have disappointed investors who were hoping for a more ambitious program in 2021. To Cardinal, the attraction of the program lies in the substantial free cash flow it will generate. Because the company does not need to drill any wells this year -- it can do workovers on existing wells instead, which should boost production enough to offset natural declines -- it can stick to a budget of just $30-million while achieving an estimated $70-million to $75-million in cash flow. That works out to $40-million to $45-million in free cash flow, which Cardinal plans to use for debt repayment. Its net debt was $259-million as of Sept. 30, for a debt-to-cash-flow ratio of 4.4 times. Cardinal sees this ratio improving to 2.2 times by the end of this year.
There is at least one investor who is probably on board with Cardinal's plans. Last month, the company closed a $20-million debt and equity financing, with the main subscriber being N. Murray Edwards -- the billionaire backer behind Canadian Natural Resources Ltd. (CNQ: $31.36) and other energy companies. Mr. Edwards now owns about 18 per cent of Cardinal's equity. It is hard to imagine that Cardinal declined to share its 2021 plans with Mr. Edwards prior to this financing. Regular investors had to wait until January.
Further afield, Craig Steinke and David Elliott's Reconnaissance Energy Africa Ltd. (RECO) added 41 cents to $4.49 on 4.57 million shares, after touting a planned seismic survey at its Kavango basin assets in Namibia. The company has hired Polaris Natural Resources (a Canadian firm) to collect 450 square kilometres worth of 2-D seismic data. For context, Reconnaissance's overall acreage in the Kavango basin covers 8.5 million acres, or closer to 35,000 square kilometres. This initial chunk of 450 square kilometres was picked to tie into the three-well drill program that is currently in progress. Reconnaissance started the first well last week and hopes to reach total depth by the end of next month.
Based on the stock's blissful rise to around $4.50 from just 30 cents over the last nine months, investors have no shortage of high hopes for this program. Even so, news of a seismic survey would not ordinarily be expected to cause a 10-per-cent jump in the share price. Some of today's excitement likely stemmed from a strikingly boosterish research note by Haywood analyst Christopher Jones. Mr. Jones opined this morning that Reconnaissance has "all the ingredients to establish and exploit the potential of the Kavango basin." The seismic program, in his view, underscores the company's position as "leaders of understanding the basin ... [giving it] plenty of opportunities to enter strategic joint venturers (farm-outs)." He sees joint venture discussions occurring as early as the second half of 2021. Notably, while Mr. Jones hiked his official price target to $7 from $4, he emphasized that even a "modest" discovery would be a boon for Reconnaissance. In such a case, he sees the stock heading as high as $24. The stock closed today at $4.49.
© 2021 Canjex Publishing Ltd. All rights reserved.